Bank of Mexico Tightens for Fourth Time in 2018

December 20, 2018

A 25-basis point increase in Mexico’s overnight interbank rate to 8.25% announced today¬† brings the cumulative increase this year to a full percentage point, which matches what the Fed did this year and keeps the premium relative to the federal funds target at a very wide six percentage points. Aside from earlier hikes this year in November, June and February, Mexico’s benchmark was rised by 150 basis points in 2017 and 250 bps in 2016.

To head off inflation from a steep depreciation of the peso caused by U.S. President Trump’s hostile immigration and trade stances toward Mexico, the Bank of Mexico has raised its rate by five percentage points since Trump became a serious contender for the Republican nomination. That’s a huge price to pay for one man’s loose speech, and this week’s U.S. budget crisis leaves no doubt that a border wall remains high among the president’s priorities. That said, it should be noted that the peso reacquired a 19 per dollar handle, showing strength this week against the U.S. currency.

Bank of Mexico authorities released a statement after today’s meeting that mentions greater in-country risks due to the uncertain policies proposed by this year’s newly elected government. Officials suggest that more monetary restraint is still possible. Inflation stood at 4.7% in November with a core rate of 3.63%, and an upward shift in the balance of inflationary risks is being watched carefully.

In the presence and possible persistence of factors that, by their nature, involve risks to both inflation and inflation expectations, monetary policy will be adjusted in a timely and robust manner to achieve the convergence of inflation to its 3% target and to strengthen the anchoring of medium- and long-term inflation expectations so that they attain such target.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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